In India, Looking for a Sustainable Capitalism

As the Western economies gradually recover from the recession, there is much public debate going on in New York, Paris, and London as to whether the traditional capitalist model we are used to is able to bring back sustainable growth.

There is no doubt that the capitalist system underpinning Western societies is troubled, as more politicians across the political spectrum and even some Fortune 500 CEOs deem it excess-prone and inefficient.

But we should be careful not to throw the baby with the bathwater. Traditional capitalism remains a pretty good way to run an economy. Born during the industrial revolution, this system has raised standards of living across the Western Hemisphere by accelerating innovation, promoting competition and giving customers greater choice.

However, this same brand of capitalism has also spawned two major negatives: excess and exclusion. To feed its hunger for growth, capitalism as we know it requires plenty of resources — financial, technological, and natural. But this resource-intensive model is no longer sustainable since, as the West is now experiencing first hand, financial and natural resources are in increasingly limited supply.

Second, traditional capitalism often leads to exclusion. Beholden to Wall Street’s short-term objectives, an obsession with the bottom line means that the broader concerns of stakeholders are often sacrificed to the narrower interests of shareholders.

To address these negatives, a new iteration of capitalism is needed, one that builds on the strengths of an earlier model but offers inclusiveness and sustainability as well. This new brand of capitalism must take a longer-term view and include the socio-economic as well as environmental sustainability that will ultimately drive financial sustainability for businesses and consumers alike.

To remain sustainable, capitalism must employ the frugal and inclusive principle we call “more for less for more“ — i.e., it must deliver more value using less money and resources for more citizens. Western CEOs and politicians can find inspiration for building this new version of capitalism in emerging markets like India.

Since it opened up in 1991, the Indian economy has brought its citizens greater liberty (freedom of choice), diversity (due to increased competition among suppliers), and connectivity (thanks to the mobile telecom revolution). Liberty, diversity, and connectivity are indeed hallmarks of Western capitalism.

However, the development trajectory of free-market market capitalism in India is poised to follow a different route because it also suffers from something Western nations were not accustomed to until recently: scarcity.

This pervasive scarcity of financial, technological and natural resources has led innovative Indian corporations and entrepreneurs to develop frugal products and services that deliver more value at less cost for more people. These innovators aren’t performing charity but operating for-profit business models built on the more for less for more principle. As such they are laying the foundation for a new breed of sustainable and inclusive capitalism.

Take the banking sector. Bankers in Wall Street and London, who have for so long lived in a bubble of their own making, are now being forced by their governments to get closer to Main Street to serve consumers’ real needs. These very bankers could learn a thing or two from innovators like YES Bank founder Rana Kapoor who found a cost-effective way to serve 600 million or so unbanked Indians.

In 2004, Kapoor left his job at a multinational bank to launch a “responsible bank” that could drive inclusiveness and sustainability across India. In the last five years, YES Bank has consistently delivered on this goal. Take inclusiveness: YES Bank was among the earliest banks to provide micro-loans directly to poor customers. For example, it handed out small loans of Rs 25,000 (US$ 542) to more than 2,000 bee farmers, who provide their honey stocks as collateral.

In addition to promoting environmental sustainability (it is the first Indian Bank to sign up for the United Nations Environment Programme Finance Initiative), YES Bank also employs clever mechanisms to drive socio-economic sustainability. For instance, it borrows cutting-edge products from corporate finance and adapts them for development banking — by, for example, securitizing the microloans of microfinance institutions (MFIs) and selling them to institutional investors as convertible debentures. In doing so, these MFIs gain access to additional capital which allows them to lend money to even more people.

Interestingly, YES Bank’s inclusive model is…highly profitable. Even though it lends 46% of its total loans to underserved segments of Indian society, it still earns 2% over its cost of lending (most banks earn 1-1.5% less than lending cost). Emboldened by the success of his sustainable banking model, Rana Kapoor plans to grow YES Bank from $4.6 billion in revenues today to $30 billion by 2015.

YES Bank’s secret? To “do more with less.” Rather than managing its technology in-house it has outsourced it all; rather than reinventing the wheel, it taps a vast network of partners who offer specialized services. Recently, YES Bank partnered with Nokia and Obopay, a mobile payment platform provider, to deliver mobile banking services to even the remotest areas of India. By leveraging an ecosystem of partners and the power of connectivity, Rana Kapoor believes his bank can cost-effectively deliver more financial value for even less cost to a much larger number of customers.

YES Bank represents a new breed of providers in emerging economies that have come up with innovative financial solutions that are simple, affordable, and yet offer high value to consumers. And they have found a way to cost-effectively scale up these solutions so that mass adoption becomes possible.

As they recover from the recession, Western economies will be forced to make their approach to capitalism leaner, more inclusive, and sustainable. They can source frugal recipes for cooking up sustainable capitalism from emerging markets like India, where innovators like YES Bank have cracked the code on how to deliver more value at less cost for more people.

Navi Radjou is Executive Director of the Centre for India & Global Business (CIGB) at Judge Business School at the University of Cambridge where Dr. Jaideep Prabhu is the Jawaharlal Nehru Professor of Indian Business and Enterprise. Dr. Simone Ahuja is the founder of Blood Orange Media and Advisor to CIGB.

Navi Radjou (left) is a Silicon Valley-based strategy consultant and a Fellow at Judge Business School, University of Cambridge where Dr. Jaideep Prabhu (middle) is the Jawaharlal Nehru Professor of Indian Business and Enterprise. Dr. Simone Ahuja (right) is the founder of Blood Orange. Radjou, Prabhu, and Ahuja are co-authors of Jugaad Innovation: Think Frugal, Be Flexible, Generate Breakthrough Growth.

Partner Center

The email and password entered aren’t matching to our records. Please try again, or reset your password. If you have a username from our previous site, start by using that. Please See our FAQ for more.

If you are signing in for the first time on the new HBR.org but have an existing account, please enter your existing user name and password to migrate your account.Please see Frequently Asked Questions for more information.